Alibaba (BABA) Beats on Q2 Earnings, Revenues Increase Y/Y

Alibaba Group Holding Limited BABA reported second-quarter fiscal 2018 (ended Sep 30, 2017) earnings of $1.29 per share, surpassing the Zacks Consensus of $1.04.

Earnings were driven by solid growth in the company’s core e-commerce business, strong growth in metrics, international strength and growing cloud-computing services.

Despite the strong second-quarter earnings, the results did not have any major impact on its share price. Its shares increased only 0.51% in the after-hours trading. Notably, the company's shares have gained 110.5% year to date, outperforming the industry’s gain of 59.9%.

Revenues

Alibaba reported revenues of RMB55.12 billion (US$8.29 billion), increasing 9.8% sequentially and 60.7% year over year. Also, revenues came in above the Zacks Consensus Estimate of US$7.78 billion.

The increase was driven by continued revenue growth in the China and International commerce retail business and strong improvement in Alibaba’s cloud business.

Revenue by Segments

Starting first-quarter fiscal 2017, Alibaba commenced segment reporting. It has four reportable segments — Core Commerce, Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives. The details of these segments are discussed below.

Core Commerce – This segment comprises marketplaces operating in retail and wholesale commerce in China, and international commerce. Revenues in the quarter were RMB46.46 billion (US$6.98 billion), reflecting an increase of 63% on a year-over-year basis.

· China commerce retail business (72% of total revenues) – This business vertical’s revenues in the quarter were RMB39.6 billion (US$5.9 billion), reflecting an increase of 64% year over year. The increase was driven by robust growth in customer management and commission revenues as well as the consolidation of Intime starting in mid-May 2017.

· China commerce wholesale business (3% of total revenues) – This business generated revenues of RMB1.71 billion (US$258 million), reflecting an increase of 19% year over year. The increase was due to a rise in average revenue from paying members on the company’s 1688.com platform.

· International commerce retail business(5% of total revenues) – Revenues in the quarter were RMB2.88 billion (US$433 million), increasing 115% year over year. The increase was driven by growth in revenues generated from Lazada and AliExpress.

· International commerce wholesale business (3% of total revenues) – This business generated revenues of RMB1.65 billion (US$248 million), increasing 10% year over year. The growth was due to an increase in online marketing revenues.

· Others business (1% of total revenues) – This business generated revenues of RMB0.66 billion (US$0.99 million), reflecting an increase of 530% year over year.

Cloud Computing – This segment comprises Alibaba Cloud, offering a complete suite of cloud services. Revenues in the quarter were RMB2.98 billion (US$447 million), up 99% year over year, driven by an increase in the number of paying customers and improved revenue mix to higher valued-added services.

In the second quarter, Alibaba Cloud launched 245 new products and features to enable small and large enterprises to achieve higher computing performance and storage capability.

Digital Media and Entertainment – The segment operates businesses through media properties, which includes UCWeb, Youku Tudou, OTT TV service, Alibaba Music and Alibaba Sports. Revenues were RMB4.80 billion (US$721 million), reflecting an increase of 33% on a year-over-year basis. The growth was driven by an increase in revenues from mobile value-added services provided by UCWeb, such as news feeds and mobile search, and an increase in subscription and advertising revenues from Youku Tudou.

Innovation Initiatives and Others – This segment includes businesses such as the YunOS operating system, AutoNavi, DingTalk enterprise messaging and others. Revenues in the quarter were RMB887 million (US$134 million), up 27% year over year.

Key Metrics

Mobile Monthly Active Users (MAUs) – Mobile MAUs were 549 million, improving 22% year over year and 4% sequentially. This was because of an increase in adoption of mobile devices by consumers, as the primary method of accessing Alibaba’s platforms.

Annual Active Buyers – China retail marketplaces had 488 million annual active buyers in the 12-month period ended Jun 30, 2017, reflecting 11% year-over-year growth and 5% sequential growth.

Operating Results

Pro forma gross margin was 60.1%, down 512 basis points (bps) sequentially and 615 bps year over year.

Alibaba’s operating expenses of RMB16.5 billion increased 73.2% year over year.

On a GAAP basis, Alibabagenerated net income of RMB17.4 billion(US$2.6 million) compared with RMB7.1 billionin the year-ago period.

Alibaba generated adjusted net income of RMB22.1 billioncompared with RMB12.9 billionin second-quarter fiscal 2017.

Balance Sheet

Alibaba exited fiscal second quarter with cash and cash equivalents and short-term investments of approximately RMB159.9 (US$24.0 million) billion against RMB148.2 (US$21.9 million) in the prior quarter.

Cash Flow/Share Repurchase

Cash flow from operations was RMB30.5 billion (US$4.59 billion) compared with RMB25.3 billion (US$3.73 billion) in the previous quarter. Free cash flow was RMB22.5 billion (US$3.38 billion) compared with RMB22.1 billion (US$3.27 billion) in the prior quarter.

Zacks Rank and Stocks to Consider

Currently, Alibaba Group has a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader technology sector are NVIDIA Corporation NVDA and SMART Global Holdings, Inc. SGH, each sporting a Zacks Rank #1 (Strong Buy), while Applied Materials, Inc. AMAT, carrying a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings per share growth rate for NVIDIA Corporation, SMART Global and Applied Materials is projected to be 11.2%, 15.0% and 17.1%, respectively.

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